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Focus: Alberta case shows how to get stay lifted

A Toronto lawyer says an Alberta case provides lessons for lawyers across the country on how to get an automatic stay lifted to bring class actions against bankrupt individuals where fraud is alleged.

The case, Da Silva v. River Run Vistas Corporation, involves a group of southwestern Alberta investors who were given the go ahead to launch a $15-million class action related to an alleged real estate fraud, after the court ruled two individual defendants could not hide behind the stay of all legal proceedings granted to them in their bankruptcies.

Alberta Court of Queen’s Bench Justice Jo’Anne Strekaf’s decision, one of her last before her elevation to the province’s appeal court, sided with the plaintiffs in their request to lift the stays granted to Colin Becker and William Bradley ahead of their scheduled discharge from bankruptcy in 2019, so that the lawsuit against them and their property development companies could proceed before then.

Debts or liabilities arising out of fraud survive bankruptcy under the Bankruptcy and Insolvency Act, but while the stay remains in place, Strekaf said in her decision that plaintiffs must offer some evidence of fraud to justify lifting it, while noting that the threshold is “low.”

Michael Nowina, a partner in the global financial restructuring and recovery practice group at Baker McKenzie, says since the BIA is a federal statute, the case has application beyond the borders of Alberta, and it reflects “the willingness of Canadian courts to lift the stay” in the context of a class action. “The case makes it clear that you don’t have to prove a prima facie case of fraud at this stage of the proceedings.

But you do have to put forward more than just bald allegations,” says Nowina, who works out of the firm’s Toronto office. “It’s not a high bar to clear, but it is an important hurdle to get over for the stay to be lifted.”

Chad Babiuk, a partner at Calgary litigation boutique Code Hunter LLP, acted for the plaintiffs. He says his clients, about 90 people who invested money in the River Run Vistas project, a proposed development on land near Blairmore, Alta., 200 kilometres south of Calgary, were “very pleased” with the result.

“The stays were something that prevented us from continuing the proceeding, so the decision allows us to move forward with the case at large against all the defendants. “We were in a kind of holding pattern without the ability to proceed against all of the parties because it was impractical to pursue some of them without the participation of others,” Babiuk says. “This is still a proposed class action, so the next step is to schedule an application to have it certified,” he adds.

The case dates back to 2007, when, according to Strekaf’s judgment, the plaintiffs allege they invested $14 million in the proposed 67-home residential development marketed by two companies owned and operated by Becker and Bradley.

The investments were secured by a first mortgage on the land, which had also been valued at $14 million.

The judgment says a second valuation priced the land at more than $11 million in 2009, but work stalled on the development and, by 2015, the value had fallen to just $600,000.

Neither Becker nor Cooper responded to a request for comment through their lawyer. But in a statement of defence filed with the court in July 2015, the pair called for the action to be dismissed against them, arguing any claim should be brought against their companies alone, rather than them individually.

They also deny making any representations to the plaintiffs or owing them any fiduciary duty. In any case, the pair says in its defence statement that the claim is statute barred, arguing that it was launched more than two years after the events in question.

The plaintiffs filed their action in mid-2014 against Becker, Bradley and their companies, as well as the company that carried out the first two valuations, claiming $14 million plus another $1 million for punitive damages.

However, they quickly ran into the problem of Becker and Bradley’s assignments in bankruptcy in late 2010.

Each received a conditional discharge in February 2014, which are scheduled for completion in early 2019, forcing the plaintiffs to go to court to have their automatic stays lifted.

In her decision, Strekaf found they had done enough to pierce the bankruptcy shield.

“Having regard to the low threshold of evidence and the absence of any contradictory evidence from the Defendants, the evidence before me raises sufficient suspicious circumstances to warrant an inference of fraud that merits permitting the action to proceed against Messrs. Becker and Bradley at this stage,” she wrote.

“While property values can fluctuate, the unexplained reduction of value for land in Blairmore, Alberta from $14 million in 2007 to less than $700,000 in 2015 raises concerns.”

The judge noted that the pair had also been charged criminally with fraud by the time of the hearing — a media release by the RCMP dated June 10, 2016 says Bradley and Becker were charged with fraud and theft following a four-year investigation — although Strekaf said it wasn’t clear if the charges relate to the transactions at issue in Da Silva.

In addition, Strekaf said the plaintiffs would be materially prejudiced if forced to wait until the 2019 discharge date before moving forward with the case.

Kelli McAllister, a class action defence lawyer in the Calgary office of McCarthy Tétrault LLP, who was not involved in the Da Silva case, says there are few previous examples of a BIA stay being lifted to allow a class action to proceed against individuals.

“They seem to be quite rare,” says McAllister, speaking on her own behalf rather than her firm’s. “Other cases have been brought under the [Companies’ Creditors Arrangement Act], but there hasn’t been much success in terms of lifting the stay.”

Nowina says that the different aims of the CCAA, which is focused on restructuring the insolvent business, changes the test for the lifting of a stay compared with the BIA.

For example, in the case of Chinese timber company Sino-Forest Corp., an Ontario judge declined to lift the automatic stay to allow a class action alleging securities fraud to proceed against the company and some of its directors, auditors and underwriters.

In his 2012 decision in Sino­Forest Corporation (Re), Ontario Superior Court Justice Geoffrey Morawetz decided the plaintiffs would be minimally prejudiced by a short delay, “which could result in clarity being brought to the proceedings,” while the defendants should be allowed to focus on the restructuring process.

“It could very well be that, within a short period of time, the situation affecting the auditors and the underwriters will be clarified such that these groups will be in a position to focus their attention on the Class Actions,” Morawetz wrote.

“The decision basically said that while the restructuring is underway, the class action plaintiffs should hold off on their claim,” Nowina says.

Within months of Morawetz’ decision in that case, the CCAA process was complete and the class action was subsequently certified.

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